Matt Smith: Brent crude oil prices were propelled to a two-year high yesterday, triggered by concerns about a Kurdish referendum vote to seek independence from Iraq. Although the vote is non-binding, a yes vote would pave the way for negotiations to secede from Iraq.
Neighboring countries such as Iran and Turkey are against the referendum, fearing that it will stoke separatist sentiment among the Kurdish population in its own countries. The vote prompted Turkey’s President Tayyip Erdogan to threaten cutting off the key supplyroute for Kurdish crude out of northern Iraq.
The Kirkuk-Ceyhan pipeline runs from northern Iraq to the port of Ceyhan in Turkey, and is the main route by which light sour Kirkuk crude leaves the Kurdish region.
We can see from our ClipperData that over 500,000 bpd of Kirkuk crude has been loaded in Ceyhan so far this year, after being delivered via the Kirkuk-Ceyhan pipeline. The crude then heads to destinations predominantly in the Mediterranean:
This is in contrast to flows out of the south of the country, which predominantly head elsewhere. Iraq’s Minister Councilor for Energy Affairs, Dheyaa Jaafar Hajam al-Musawi, said yesterday at the APPEC conference in Singapore that 56 percent of Iraqi exports head to Asia, and that this number will grow to 80 percent by 2020.
The minister’s numbers jibe with what we see in our ClipperData, with nearly 59 percent of Iraqi crude loadings from Basrah heading to Asia so far this year through August.
While Asia remains a key focus for Iraq, flows to the U.S. continue to surpass year-ago levels. Imports so far this year are averaging 580,000 bpd, a third higher than last year (which in itself was nearly double the volume in 2015).
Last month, however, we saw deliveries dip below year-ago levels for the first time since November 2014. But this was more related to hurricane activity limiting imports, as opposed to a supply-side issue from Iraq. Hence, as some semblance of normalcy returns to the U.S. Gulf Coast, imports of Iraqi crude have rebounded above year-ago levels once more:
Yup, you heard it here first (or second, maybe even third), last week was the week that it all happened, the week that we can finally call the crisis in oil prices officially over.
Okay, maybe not completely over, or even close to almost over, but is sure was nice for a while to taste the sweet nectar of oil prices over $50, no matter how fleeting that might be.
So what happened? Well, a few things.
Global storage and inventory finally seems to have turned the corner. Although as mentioned before the data is hopelessly lagged, completely untransparent and unreliable at the best of times, the anecdotal evidence is piling up. From completely unsubstantiated stories of critical supply hubs in Africa being drained of oil to another article exposing China as an oil hoarder, the trend is unmistakable – inventories are coming down. Now, if only we could have some proof…
Aside from Libya and Nigeria, the OPEC/NOPEC production restraint alliance has held up surprisingly well. With compliance high and the market seemingly turning the corner, it was interesting to hear the speculation that extending the cuts further into 2018 from the current March end date was on the table. While not explicitly discussed at this Friday’s meeting to assess the effect of the production-cap agreement and progress toward a balance between supply and demand, it will surely be on the agenda for the November semi-annual fooferah and bait and switch session.
Rhetoric and Global Instability
The world is a funny place. Just when you think we have reached some measure of peace and stability, someone throws a wrench into things. Now, aside from the usual nonsense in the Middle East, we have specific hot spots which should see the risk premium in the price of oil rise over the next few months. These include:
• The ongoing conflict in Yemen, which is increasingly expensive and distracting for Saudi Arabia and threatens to drag in the United States
• The Monday referendum on Kurdish independence in Iraq and what it means for oil production in the important Kirkuk region. Right now, it’s up in the air.
• The on-again, off-again sabre rattling by the Americans towards Iran and threats to cancel the nuclear agreement and reinstate sanctions
• The very frightening escalation of tensions on the Korean Peninsula between North Korea and pretty much the rest of the world but particularly South Korea, Japan and the United States. While presumably cooler heads on either side should and will prevail, the war of words between “Rocket Man” and “the Dotard” risks allowing events to spiral out of control.
• And who can forget the ongoing covfefe crisis in Nambia.
U.S. field activity, draw-downs of fuel supplies with the refinery shutdowns in the United States.
As noted previously, the rig count seems to have plateaued in the U.S., held back by range-bound oil prices, rising field costs and skittish capital markets. This makes the predicted tsunami of tight oil less likely to overwhelm the market (at least until oil hits $55 to $60, then watch out!). That said, the oil and gas sector has a tendency to over-invest at absolutely the worst time so keep an eye out.
Another significant influential factor is the knock-on effects of the shutdown of refineries due to Hurricane Harvey and the after effects of both Harvey and Irma. In a nutshell, huge draw-downs in fuel and distillates (think cars, diesel for heavy machinery) are not being supported fully by refinery runs which will serve to draw down the excess inventory and are quite bullish for prices.
The impact of lower investment
The IEA published a chart showing the upstream oil and gas investment was down 44 percent in 2016 from 2014. While a modest uptick is expected in 2017 (mostly U.S. tight oil and Canada), the spillover effect of this drawback in investment is in most analyst’s views likely to be tight supply starting perhaps as early as late 2018, especially if the OPEC cuts hold and the US has really plateaued.
But the big catalyst?
Let’s face it, most of the above are supply side and are all at the margin. The biggest factor in any strength of prices or longer-term reduction in inventory has to be demand driven. Well I guess it’s fair to say that the consumer has finally delivered on cue. According to the IEA, demand growth is a robust 1.6 million barrels a day so far this year, far ahead of earlier forecasts and supporting some of the highest levels of global GDP growth in recent memory, proving yet again that the world craves nothing more than sweet, cheap oil. Can we go to $60 and not knock the recovery on its ass? I believe so.
The Jeff Rubin Effect
OK, not a big factor, but I read an article this week that reminded me of it. Canada’s very own wavy haired and silver-tongued prognosticator of all things extreme has emerged from hiding and pronounced that new pipelines are unnecessary because oil is dead and oilsands are uneconomic, too expensive and that we should all move on with our lives. This is the same Mr. Rubin who predicted $200 oil prices back in 2006 right before oil plunged from $147 to $40 a barrel and subsequently predicted the demise of the industry right before the last run-up in oil prices. Always the contrarian, always provocative and entertaining but often negatively correlated with the market – the Jeff Rubin effect is a real thing. If he’s telling me to sell, I’m thinking it may be time to buy.
So are the good times here to stay?
Good times is such a relative term right? In 2014 $50 oil was the nightmare scenario. Here at the end of the third quarter of 2017, a full three years after prices started to crater, it’s time to break out the bubbly. Realistically, I don’t think we are out of the woods by any stretch and we are certainly not in good times quite yet. Where we are is better times. Better than last week. Better than a few weeks ago. Absolutely better than February 2016 that’s for sure. I don’t think there is any sense in getting too carried away on the back of a one-week rally in oil prices that puts us barely over $50 a barrel, but it sure feels better this week than last.
Am I changing my forecast yet again? Nope. $56 is where I revised myself to. Seems a pretty good call at this point. – Stuart Parnell
Healthy demand growth for fuel not only in emerging economies led by China and India, but also in Europe, is helping global inventories to draw down faster now, keeping the oil market on the right track towards rebalancing, according to industry executives who spoke at a conference on Tuesday.
“We see the market over the next six months going well above $60 for a simple reason … surprisingly good demand,” Adi Imsirovic, Head of Oil Trading at Gazprom Marketing and Trading, said at the S&P Global Platts APPEC conference in Singapore, as quoted by Reuters.
Global demand growth is “coming somewhere close to 1.6 to 1.7 million barrels per day and is driven by distillates,” BP’s Regional CEO for Supply and Trading for the Eastern Hemisphere, Janet Kong, said at the conference.
Diesel demand surged after Hurricane Harvey knocked offline more than 20 percent of U.S. refinery capacity at the peak of shutdowns, but demand was strong even before the storm, according to executives and analysts.
“What Harvey did is accelerate a process that was already underway,” Reuters quoted Robert Campbell, head of oil products analysis at Energy Aspects, as saying.
According to Mike Muller, Vice President of Crude Trading & Supply at Shell Trading, the soaring diesel fuel demand and the buying of crude oil to fill strategic reserves have been the key drivers of this year’s higher oil demand growth.
Earlier this month, the International Energy Agency (IEA) revised upwards its forecast for oil demand growth this year to 1.6 million bpd from the previous estimate for 1.5 million bpd growth.
The expected strong demand growth, coupled with OPEC’s production cuts, is making oil analysts and traders at the Singapore conference more bullish this year than at the same event last year, according to Bloomberg. But experts warn that OPEC needs to extend the cuts beyond March 2018 in order to continue depleting crude oil stockpiles.
The outlook for the rest of this year looks bullish, but the market will be put to the real test in March 2018, when demand will be seasonally lower. Oil prices are unlikely to keep a sustainable level above US$60 because U.S. shale supply would rapidly increase, effectively capping oil prices, oil traders tell Bloomberg. – Tsvetana Paraskova
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